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An Indian conglomerate with 8 subsidiaries processes approximately 240 intercompany transactions per month — management fees, shared services charges, intercompany loans, and technical service fees. Each transaction carries GST implications, TDS obligations, and transfer pricing constraints. At consolidation, all of them must eliminate cleanly.
Most do not — and the reconciliation backlog at consolidation time reflects the errors accumulated across all 8 entities.
What Makes Intercompany Reconciliation Hard
Intercompany reconciliation is harder than third-party reconciliation for three structural reasons:
1. Both sides of the transaction must agree: A third-party receivable is reconciled against the bank credit. An intercompany receivable is reconciled against the counterpart entity’s payable — both of which are controlled by the same group but recorded in separate systems, sometimes with different accounting treatment.
2. Tax treatment is not optional: GST applies to intercompany supplies even without consideration. TDS applies to intercompany payments for services. Both must be recorded correctly in both entities’ books — and they often are not, because the entities treat intercompany transactions as internal and bypass normal compliance procedures.
3. Transfer pricing constraints: The arm’s length price documented in the transfer pricing study may differ from the actual charges. Reconciling the actual transaction amounts to the TP study is a mandatory exercise for groups with intercompany transactions above the threshold.
GST on Intercompany Transactions
The Supply Between Distinct Persons
Under GST, supply between distinct persons (related parties or different GSTINs of the same entity) is taxable even when there is no consideration — or when the consideration is below market value. Rule 28 of the CGST Valuation Rules requires the value to be the open market value.
Common intercompany GST scenarios:
| Transaction type | GST treatment | Common error |
|---|---|---|
| Holding company charges subsidiary management fee | IGST/CGST+SGST applicable | Not charged — treated as internal reallocation |
| Shared IT infrastructure charged across entities | GST on cost recharge | Rate applied on cost including GST — double taxation |
| Head office to branch (same legal entity, different GSTIN) | Taxable supply under Section 25 | Not invoiced — treated as internal transfer |
| Intercompany loan interest | Exempt if between body corporates | GST charged — creates excess ITC complexity |
TDS Between Group Companies
TDS provisions do not have a group company exemption. A parent company paying a subsidiary for professional services must deduct TDS at 10% under Section 194J. A subsidiary paying management fees to the holding company faces the same obligation.
Transfer Pricing and Intercompany Pricing
Transfer pricing reconciliation is a separate exercise that feeds into the intercompany reconciliation. The reconciliation must confirm that:
- The actual charges between entities match the documented arm’s length price
- Any deviations from the TP study have been documented with a business reason
- The aggregate intercompany charges are consistent with the TP study’s total recharge allocation
Deviations discovered at year-end — after all intercompany transactions have been posted — require restatement entries that complicate consolidation.
Elimination Entries for Consolidated Financials
The Cut-Off Problem
The most operationally damaging intercompany reconciliation error is timing difference at cut-off. Company A records a management fee invoice on March 30. Company B records the corresponding expense on April 5 (received the invoice late). At March 31 consolidation, Company A shows a receivable and Company B shows no corresponding payable.
The elimination entry fails. The consolidated balance sheet has a ₹50 lakh intercompany receivable with no offset.
Solution: Agree an intercompany cut-off date by February 28. All intercompany transactions must be invoiced and recorded by both entities before this date. Transactions after February 28 default to the following financial year.
Automating Intercompany Matching
Reconciliation software India that handles intercompany reconciliation stores the intercompany matrix — which entity owes which to which — and matches receivables to payables across entities, flagging timing differences and amount mismatches before they reach consolidation.
GST reconciliation software that handles intercompany GST ensures that GSTR-1 output tax on intercompany supplies in one entity matches the GSTR-2B ITC input in the counterpart entity — preventing ITC gaps on intercompany transactions.
The GST portal publishes the valuation rules for related party transactions and the specific compliance requirements for supply between distinct persons under Section 25.